[Solved by Experts] 1 Explain Direct
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It assesses the following learning outcomes:
· Understand the three basic types of manufacturing.
· Identify direct and indirect costs
· Prepare a schedule of costs of finished goods
· Distribute overheads into a product cost.
· What drives the overhead cost
· Differentiate between Job order, Process costing
· Apply cost volume profit analysis in business, understand economies of scale.
1. 1.- Explain direct production cost versus indirect production const, give a numerical example. (5 points)
2. 2.- Explain variable production cost versus fixed production costs, give a numerical example. (5 points)
3. 3.- Explain period cost versus product cost, give a numerical example. (5 points)
4. 4.- What does break even mean? (5 points)
Today, Saturday January 2021, early in the morning and just after the first cup of coffee I remembered my first professional assignment.
It was two years ago, and I had just joined a company called Silence. I remember being very happy, finally after so many years of study I had completed my studies at EU Business School, and there it was, my first challenge. Silence S.A. was a manufacturing company producing electrical motorcycles, it was barely a startup, growing at a fast pace, so the accounting and financial procedures were still not very clearly structured, and I had a nice opportunity to start working as an assistant to the CFO, Mr. Mariano Molero.
In the coming days we had a meeting with a potential investor, the company had the idea to expand very fast and increase production from a level of 30 motorcycles per day to 300 hundred per day, meaning increasing capacity 1000%. For this expansion the company needed to invest 10.000.000€, and Mr. Molero was convinced that the potential investor could be interested in investing in this project.
The owner of the Silence, Mr. Singla, was an experienced engineer who had great knowledge of the technologies used the market, distribution and sales process, but he had little knowledge about accounting and finance, so he was fully relying on Mr. Molero.
Two days before the meeting, I suddenly received a what sup message from Mr. Singla, he was telling me that Mr. Molero had been affected by a strange disease and was at the hospital. He asked me to prepare the financial part of the presentation for the investor.
The information I had was:
For the year just completed 2019, the company had the following information:
The number of units sold is 2160
The sales price per unit is 3000
The direct materials cost per unit is 2000
The indirect material cost for the year is 1000080
The manufacturing unit has a plant manager who organizes all production activities, the annual cost for the plant manager is 80000 Mr. Molero explained me before going to the hospital that his job is essential to the production area, not a single motorcycle would be produced if he were not there.
During the year they had 21,6 production workers in average, which are working with the motorcycle production, but the have a special contract so that the numbers of workers can increase or decrease, depending on the demand, without any additional cost for hiring or firing employees. The cost per worker was 20000 in a yearly basis. Mr. Molero explained that they need 0,01 production worker per each motorcycle that they produce.
The company has a logistic department taking care for the movements in the plant, during the year the had an average of 4,32 workers. Those workers have also the same flexible agreement as the production workers, which will vary depending on the demand. The cost per worker and per year is 22000.
Mr. Molero explained that they need 0,002 logistics worker per each motorcycle that they produce.
There is also a maintenance department with two employees. Those workers have a fixed schedule, as the maintenance is preventive and does not change with the volume demand. The yearly cost per worker is 30000.
The company has a sales team with 3 employees and a cost of 34000 per employee per year. The sales employees are also receiving a commission of 1% over sales.
The company has an administration department with 2 workers and an annual cost per worker of 26000, who are managed by a CFO that has a yearly cost of 85000.
The company has a machinery and installations that had a cost when acquired two years ago of 2000000, the depreciation of the machines is calculated straight line over 10 years.
The company is producing in a production hall that was acquired 2 years ago at a cost of 1000000, and they are depreciating it straight line during 50 years.
The administration department work in an office which was rented at a cost of 1500 per month, the rental agreement was signed for a period of 5 years.
The furniture and elements that they have in the office are being depreciated at a cost of 6250 per year.
The company has also utility costs, of which 6000 were related to the offices during the year, and a utility cost of 40 per unit produced in the production plant.
The inventory of motorcycles at the beginning of the year was 5 units, the same that they had at the end of the year.
a) Prepare the income statement and explain which of the cost lines is direct or indirect costs and why. (14 points)
b) Explain which of the cost lines are fixed or variable and why. (14 points)
c) Explain which of the cost lines are product cost or period cost and why. (14 points)
d) Which is the Gross margin for the company? (5 points)
e) Which is the contribution margin, and the contribution margin ratio of the company? (8 points)
f) What number of units must the company sell for break-even (5 points)
g) What is the sales figure that the company need to achieve if the want to have an EBIT of 1000000? (5 points)
h) What would be the EBIT if the company increases salaries in 12% and increases sales units in 12%? (5 points)
i) The company receives a proposal of a customer that wants to buy 3000 units at a price discount of 8%.
In this case this sale would not affect our traditional customers, they would not notice. Should we accept the order if we do not have capacity constrains? (5 points)
j) What are the dangers of using CVP analysis? (5 points)